Asset allocation before/during Retirement

[captainspoke]

Here's my allocation. (again, I'm 72 and retired)

I have enough cash here in japan for at least the next several years. Separate from that, my investment account in the US is over 98% equities, and zero bonds. It's denominated in dollars, and I see no reason to hedge. About 10% of that account is my sandbox, where I allow myself to ((play and)) make mistakes. The other 90% is maybe 7 ETFs, which cover equities in a few different ways, but well over half of it all has a definite 'growth' (tech) slant.

Keeping it simple.

[ToushiTime]

Here's my allocation. (again, I'm 72 and retired)

I have enough cash here in japan for at least the next several years. Separate from that, my investment account in the US is over 98% equities, and zero bonds. It's denominated in dollars, and I see no reason to hedge. About 10% of that account is my sandbox, where I allow myself to ((play and)) make mistakes. The other 90% is maybe 7 ETFs, which cover equities in a few different ways, but well over half of it all has a definite 'growth' (tech) slant.

Keeping it simple.

Abandoning bonds for a cash bucket would be temptingly clean and simple, but… I still have some doubts…

Yes, bond funds have not done well recently:

IEF 7-10 years Treasury ETF had a cumulative total return of –7% for the past five years and only +9% for the past 10 years. They could easily have been wiped out if the yen had gone the other way.
https://www.ishares.com/us/products/239 ... hartDialog

And the eMaxis Developed Bond fund (Hedged) has a total return of –18.32％ over the past 8 years.
https://site0.sbisec.co.jp/marble/fund/ ... =103312167

However, going further back…

The unhedged FTSE/Citigroup WGBI Non-JPY (JPY) benchmark behind the eMaxis SLIM bond fund gave total returns (yen based including dividends) of +9% since 1985, +90% since 2009, and 46% since 2014 and 32% since 2018
https://myindex.jp/data_i.php?q=CI1020JPY (use the いくらになる？ function for cumulative returns)

Adjusting for inflation and currency effects, I work out a slight positive total return since 1985, a large positive gain of around 30-40% since 2009 (unsurprising given quantitative easing) and negative total return of about 15% since 2014.

The same page on myindex shows individual returns in each year, where you can see how bonds recovered faster than stocks.

And the 2nd chart in this page on AGG shows how the Aggregate Bond Index offset stock crashes
https://www.ishares.com/us/insights/bon ... -investing

Bonds and equities maybe more correlated than in the past but surely this offsetting feature might be worth having in retirement?
This time round, stocks have done well and bonds have done badly, but things might be different next time...
On the other hand, there are structural issues such as massive debt overhangs so we could be in for more of the same bond doldrums.

[ChapInTokyo]

Here's my allocation. (again, I'm 72 and retired)

I have enough cash here in japan for at least the next several years. Separate from that, my investment account in the US is over 98% equities, and zero bonds. It's denominated in dollars, and I see no reason to hedge. About 10% of that account is my sandbox, where I allow myself to ((play and)) make mistakes. The other 90% is maybe 7 ETFs, which cover equities in a few different ways, but well over half of it all has a definite 'growth' (tech) slant.

Keeping it simple.

Abandoning bonds for a cash bucket would be temptingly clean and simple, but… I still have some doubts…

Yes, bond funds have not done well recently:

IEF 7-10 years Treasury ETF had a cumulative total return of –7% for the past five years and only +9% for the past 10 years. They could easily have been wiped out if the yen had gone the other way.
https://www.ishares.com/us/products/239 ... hartDialog

And the eMaxis Developed Bond fund (Hedged) has a total return of –18.32％ over the past 8 years.
https://site0.sbisec.co.jp/marble/fund/ ... =103312167

However, going further back…

The unhedged FTSE/Citigroup WGBI Non-JPY (JPY) benchmark behind the eMaxis SLIM bond fund gave total returns (yen based including dividends) of +9% since 1985, +90% since 2009, and 46% since 2014 and 32% since 2018
https://myindex.jp/data_i.php?q=CI1020JPY (use the いくらになる？ function for cumulative returns)

Adjusting for inflation and currency effects, I work out a slight positive total return since 1985, a large positive gain of around 30-40% since 2009 (unsurprising given quantitative easing) and negative total return of about 15% since 2014.

The same page on myindex shows individual returns in each year, where you can see how bonds recovered faster than stocks.

And the 2nd chart in this page on AGG shows how the Aggregate Bond Index offset stock crashes
https://www.ishares.com/us/insights/bon ... -investing

Bonds and equities maybe more correlated than in the past but surely this offsetting feature might be worth having in retirement?
This time round, stocks have done well and bonds have done badly, but things might be different next time...
On the other hand, there are structural issues such as massive debt overhangs so we could be in for more of the same bond doldrums.

Having a diversified portfolio including bonds seems to me to be a historically validated strategy. This below from Benjamin Graham’s “Intelligent Investor” :

[ToushiTime]

Here's my allocation. (again, I'm 72 and retired)

I have enough cash here in japan for at least the next several years. Separate from that, my investment account in the US is over 98% equities, and zero bonds. It's denominated in dollars, and I see no reason to hedge. About 10% of that account is my sandbox, where I allow myself to ((play and)) make mistakes. The other 90% is maybe 7 ETFs, which cover equities in a few different ways, but well over half of it all has a definite 'growth' (tech) slant.

Keeping it simple.

Abandoning bonds for a cash bucket would be temptingly clean and simple, but… I still have some doubts…

Yes, bond funds have not done well recently:

IEF 7-10 years Treasury ETF had a cumulative total return of –7% for the past five years and only +9% for the past 10 years. They could easily have been wiped out if the yen had gone the other way.
https://www.ishares.com/us/products/239 ... hartDialog

And the eMaxis Developed Bond fund (Hedged) has a total return of –18.32％ over the past 8 years.
https://site0.sbisec.co.jp/marble/fund/ ... =103312167

However, going further back…

The unhedged FTSE/Citigroup WGBI Non-JPY (JPY) benchmark behind the eMaxis SLIM bond fund gave total returns (yen based including dividends) of +9% since 1985, +90% since 2009, and 46% since 2014 and 32% since 2018
https://myindex.jp/data_i.php?q=CI1020JPY (use the いくらになる？ function for cumulative returns)

Adjusting for inflation and currency effects, I work out a slight positive total return since 1985, a large positive gain of around 30-40% since 2009 (unsurprising given quantitative easing) and negative total return of about 15% since 2014.

The same page on myindex shows individual returns in each year, where you can see how bonds recovered faster than stocks.

And the 2nd chart in this page on AGG shows how the Aggregate Bond Index offset stock crashes
https://www.ishares.com/us/insights/bon ... -investing

Bonds and equities maybe more correlated than in the past but surely this offsetting feature might be worth having in retirement?
This time round, stocks have done well and bonds have done badly, but things might be different next time...
On the other hand, there are structural issues such as massive debt overhangs so we could be in for more of the same bond doldrums.

Having a diversified portfolio including bonds seems to me to be a historically validated strategy. This below from Benjamin Graham’s “Intelligent Investor” :

Graham said defensive investors should go 50/50 bonds stocks, and enterprising investors should even raise bonds to 75% during bull markets and lower to 25% during bear markets.

Buffett, his student and employee, went for a 90/10 stock bond weighting for his wife’s trust, but they are billionaires and he didn’t recommend that to us mere mortals.

However, that didn’t stop a Spanish academic back-testing the 90/10 plan for retirement.
He tracked how $1,000 would do over a series of overlapping 30-year time intervals, covering 1900 to to 2014.


60/40 had 0% risk of failure (money running out within 30 years) in retirement 
90/10 had 2.3% risk of failure but significantly higher returns
50/50 had the same 1.2% failure rate as 70/30

Original paper
https://blog.iese.edu/jestrada/files/20 ... ett-AA.pdf
Investopedia article
https://www.investopedia.com/articles/p ... -sound.asp

[ChapInTokyo]

Abandoning bonds for a cash bucket would be temptingly clean and simple, but… I still have some doubts…

Yes, bond funds have not done well recently:

IEF 7-10 years Treasury ETF had a cumulative total return of –7% for the past five years and only +9% for the past 10 years. They could easily have been wiped out if the yen had gone the other way.
https://www.ishares.com/us/products/239 ... hartDialog

And the eMaxis Developed Bond fund (Hedged) has a total return of –18.32％ over the past 8 years.
https://site0.sbisec.co.jp/marble/fund/ ... =103312167

However, going further back…

The unhedged FTSE/Citigroup WGBI Non-JPY (JPY) benchmark behind the eMaxis SLIM bond fund gave total returns (yen based including dividends) of +9% since 1985, +90% since 2009, and 46% since 2014 and 32% since 2018
https://myindex.jp/data_i.php?q=CI1020JPY (use the いくらになる？ function for cumulative returns)

Adjusting for inflation and currency effects, I work out a slight positive total return since 1985, a large positive gain of around 30-40% since 2009 (unsurprising given quantitative easing) and negative total return of about 15% since 2014.

The same page on myindex shows individual returns in each year, where you can see how bonds recovered faster than stocks.

And the 2nd chart in this page on AGG shows how the Aggregate Bond Index offset stock crashes
https://www.ishares.com/us/insights/bon ... -investing

Bonds and equities maybe more correlated than in the past but surely this offsetting feature might be worth having in retirement?
This time round, stocks have done well and bonds have done badly, but things might be different next time...
On the other hand, there are structural issues such as massive debt overhangs so we could be in for more of the same bond doldrums.

Having a diversified portfolio including bonds seems to me to be a historically validated strategy. This below from Benjamin Graham’s “Intelligent Investor” :

Graham said defensive investors should go 50/50 bonds stocks, and enterprising investors should even raise bonds to 75% during bull markets and lower to 25% during bear markets.

Buffett, his student and employee, went for a 90/10 stock bond weighting for his wife’s trust, but they are billionaires and he didn’t recommend that to us mere mortals.

However, that didn’t stop a Spanish academic back-testing the 90/10 plan for retirement.
He tracked how $1,000 would do over a series of overlapping 30-year time intervals, covering 1900 to to 2014.


60/40 had 0% risk of failure (money running out within 30 years) in retirement 
90/10 had 2.3% risk of failure but significantly higher returns
50/50 had the same 1.2% failure rate as 70/30

Original paper
https://blog.iese.edu/jestrada/files/20 ... ett-AA.pdf
Investopedia article
https://www.investopedia.com/articles/p ... -sound.asp

Thanks. I am planning to add some individual Japanese stocks in the satellite part of my portfolio, so it may be that I'll end up with something closer to the recommended 60/40 stocks-bonds allocation.

One thing which struck me when I read the Investopedia article was that the Spanish professor assumes a steady 4% draw down rate adjusted for inflation. I assume that this means that if the value of the portfolio goes down by say 50% in a stock market crash the retiree is disciplined enough to adjust his/her living expenses so that 4% plus inflation draw down rate will still be enough.

That being the case, this might be a factor which might be fine for someone with a huge nest egg (like Ms. Buffett!) but maybe more difficult for someone with a more modest nest egg to do...

[RetireJapan]

One thing which struck me when I read the Investopedia article was that the Spanish professor assumes a steady 4% draw down rate adjusted for inflation. I assume that this means that if the value of the portfolio goes down by say 50% in a stock market crash the retiree is disciplined enough to adjust his/her living expenses so that 4% plus inflation draw down rate will still be enough.

No, all the x% withdrawal scenario research is based on setting the withdrawal amount at 4% at the beginning, then increasing that dollar amount by inflation each year with no variation.

This is of course completely unrealistic, as people would likely adjust their spending as you suggest.

This is why many planners suggest a higher withdrawal rate (5% or more) as long as you are able to be flexible when markets are down.

I am personally planning to use a fixed % of the portfolio as my rough withdrawal rate (ie just take out x% per year of the remaining funds rather than a set amount).

[ToushiTime]

One thing which struck me when I read the Investopedia article was that the Spanish professor assumes a steady 4% draw down rate adjusted for inflation. I assume that this means that if the value of the portfolio goes down by say 50% in a stock market crash the retiree is disciplined enough to adjust his/her living expenses so that 4% plus inflation draw down rate will still be enough.

No, all the x% withdrawal scenario research is based on setting the withdrawal amount at 4% at the beginning, then increasing that dollar amount by inflation each year with no variation.

This is of course completely unrealistic, as people would likely adjust their spending as you suggest.

This is why many planners suggest a higher withdrawal rate (5% or more) as long as you are able to be flexible when markets are down.

I am personally planning to use a fixed % of the portfolio as my rough withdrawal rate (ie just take out x% per year of the remaining funds rather than a set amount).

I guess its a matter of not panicking in crashes and sticking to plan.
Just as you would continue to DCA and not sell during crashes in the accumulation phase, you would continue to keep taking 4% + inflation out during crashes in the retirement phase, trusting that the number-crunchers were correct.
The study above and the original study by Bengen https://www.forbes.com/advisor/retireme ... etirement/ only make the claim that I can keep withdrawing 4% + inflation annually for 30 years (in the Spanish study) with only a percentage or two risk of the pot running dry.
Of course, whether those 4% withdrawals will be enough to live on depends on the initial size of my nest egg, future market trends, and my cost of living/other expenditure.

There was a big fuss a couple of years ago when the Japanese government said many people would need at least 20 million yen in private savings to retire, on top of the state pension.
4% of 20 million yen works out at 800,000 per year, which is a pittance at 67,000 yen a month.

Fortunately, most of us will have significantly more than that, plus state pensions in Japan and state pensions from our home countries, assuming that they don't get tampered with, including by means-testing - which I think Australia and a few European nations have. The new UK government is conducting a review of the state pension and has poo-pooed the idea.
https://ifs.org.uk/publications/future- ... per%20week

[RetireJapan]

you would continue to keep taking 4% + inflation out during crashes in the retirement phase, trusting that the number-crunchers were correct.

I wouldn't

I think most people would be tempted to cut their discretionary spending during stock market crashes or if their portfolio was down. This would give them an even bigger margin of safety.

(it's also where that Nikkei story we ran in the Monday Read a couple of weeks ago came from, where the average 80 year old had only spent 10% of their retirement savings...)

[ToushiTime]

you would continue to keep taking 4% + inflation out during crashes in the retirement phase, trusting that the number-crunchers were correct.

I wouldn't

I think most people would be tempted to cut their discretionary spending during stock market crashes or if their portfolio was down. This would give them an even bigger margin of safety.

(it's also where that Nikkei story we ran in the Monday Read a couple of weeks ago came from, where the average 80 year old had only spent 10% of their retirement savings...)

Wow, I didn't realize you had so much content. Do you remember the title of that story? I looked for it just now but couldn't find it.

Edit: found it. Will check it out.
https://www.nikkei.com/article/DGXZQOUA ... 4A7000000/
https://www.retirejapan.com/blog/the-mo ... eign-land/

[torata]

Ben said he would investigate about what might be on offer in Japan in relation to annuities.

Yes, I am overdue on this one!

Just a quick Google and went with Legal & General calculator not bad annuity rates. (Biggest provider of annuities in the UK) I would take at a guess that you could get better annuity rates than in Japan. One thing I would like to know is can non-resident Brits apply for these. Already non-residents are not permitted to access high interest savings accounts- Although I am sure there is a way....

Slightly off topic, but relating directly to the question above.
I think it'll probably be quite difficult to get an annuity from the UK while tax-resident in Japan.
My wife wanted to vest her private pension in the UK into an annuity while the rates were good. When I called the various best buy annuity providers they all refused to quote as non-UK resident. Luckily her pension was with an annuity provider so they did it without complaint. It wasn't their 'best buy' rate - I guess that's because they don't have the actuarial info on people outside the UK/in Japan - but was still pretty good.
This might be why the other annuity providers refused - there's no UK post code to put into their system - or could be that old KYC = mendokusai issue.

torata